Dashed White Lines
As I was driving down the freeway in commuter traffic—something I haven’t experienced in nearly a year—I was thinking about the meme stocks, like GameStop, whose stock prices recently peaked far above the fundamental value of the companies themselves. It started on Reddit as a creative way to use social media to manipulate the price of a stock to make money. That’s what big investors have done throughout the history of the stock market through various means (not memes). This time, it was done by a swarm of smaller individual investors, and once they saw the impact they had on the institutional investors, it became a battle cry to disrupt the markets. We saw a real David versus Goliath stock market battle.
I hit the brakes hard on Interstate 280 as a car swerved across two lanes of traffic and interrupted my thoughts. It’s questionable to think the sudden surge of speed would actually result in any real arrival time difference at their destination. It was also annoying. But it made me realize that the simple white paint stripes separating our lanes was the main thing that allowed all of these cars to progress in an orderly fashion down the freeway. That and a basic set of rules of the road that the majority of us choose to follow.
Did my fellow lane-hopping commuter break any laws? Maybe or maybe not. But they did create a lot of horn honking, braking and readjusting of positions in order to restore some orderly progress again. All I could do, like the other commuters on the road, was give them a wide berth and continue on our way. Eventually, they would exit the freeway and maybe the Highway Patrol would pull them over or not, but hopefully they wouldn’t cause an accident that impacted the lives of others or their own.
The Role of the SEC
The U. S. Securities and Exchange Commission (SEC) is kind of like the Highway Patrol, the court system and the Congress of the stock market. It has a three-part mission:
• Protect investors.
• Maintain fair, orderly, and efficient markets.
• Facilitate capital formation.
This is why the SEC is constantly watching new trends to determine whether a new rule needs to be made or someone needs to be cited.
In the meantime, last week there was a lot of horn honking and readjusting of positions just like on my commute. Ultimately, the price of stocks like GameStop will revert to their fundamental value again and all of the people who bought a $10 stock for $325 will end up losing a lot of money. The issue is not the hedge funds or the individual investors that participated in driving up the stock prices, as they both made their own investment decisions. It’s all of the other people who will be the collateral damage as a wreck like this is bound to impact thousands of other innocent individual investors.
The Roaring 20’s were similar to this in that investors were looking for easy money in the stock market. Stock valuations were driven up and ultimately ended in the stock market crash of the 30’s. During the next 20 years, the SEC instituted many of the rules we abide by today in our trading processes. As technology changes and more retail investors enter the market, we will see more rules instituted, if needed, to provide orderly and efficient markets.
In the meantime, our portfolio managers are actively monitoring for market abnormalities and giving a wide berth to erratic trends as we continue our journey toward our client’s financial goals.